Hospitality Financial Leadership – What’s the System?

When we are creating financial leadership in our hotel we’re focused on the system we use. When I say "system" in this context I am not talking about a computer system. We may use a computer and software when we construct the forecasts and budgets. What I’m talking about in this article is the Financial Communication System. What’s my system for creating financial information in my hotel? How does it work and how can I enhance the system and get a better result? This article focuses on creating and maintaining an effective business system in your hotel.

“Systems are everything to a business. Don’t change the people. Change the system.” – Steve Chandler

When people understand and use the business system well we get a superior result. When people don’t understand the business system and can’t follow the business system we get a poor result. What’s the business system in your hotel?

By definition, a system produces something. In the hotel business, we have lots of systems we create, manage and follow. In operations, we have many great examples of systems we use to effectively manage. One good example is the system housekeeping uses to turn the house. We wake up every day with hundreds of dirty occupied rooms and we move through our system to check out and clean these rooms and ultimately sell them again a few hours later. It’s not rocket science but there is a system to follow; to manage and to ensure its ongoing health is paramount to our prosperity. Room inventory is established, sections are assigned, staff is deployed, the cleaning is done, one by one the rooms come back, maybe we inspect them and we’re ready for the next guest. Every day that we work the system, we learn what worked and we adjust and innovate where it didn’t work.

“I cannot say whether things will get better if we change; what I can say is they must change if they are to get better.” – Georg C. Lichtenberg

With the financial piece in our hotel, we don’t naturally see the process as a system we can develop and evolve. The reason we don’t readily see this is because the system is hidden and it’s not used by most leaders. Most hotels don’t produce a monthly forecast and they don’t get their managers to participate in the financial system. The system in most hotels is that the controller or director of finance produces the forecast and reviews it with the GM and then it is sent to corporate.

In some cases, the departmental numbers are shared with the operations managers with the hope that they will aspire to hit these targets. Very rarely do we find hotels that have forecasts and budgets that have been created by the line managers. This line manager creation is the level you should be aspiring to in your hotel. Imagine your department managers know how much revenue is expected this month. At the same time, they know the corresponding expenses planned for the same period in detail from a zero base. With their payroll, they know their staffing formula and its fixed and variable components. Lastly, imagine your managers tracking their revenues in the month for the month and then, in turn, they adjust their expenses and payroll to control their flow through.

When we don’t have a system to follow this is impossible and it results in the tail wagging the dog. When we face a challenging month, revenue wise, we are largely unable to react. We are unable to react because no one knows what’s in the middle of his or her statements. You might be reading this and shaking your head. Why is this the case? Why is it so hard to get my hotels and their department managers to know their numbers?

The answer is: they don’t have a system to follow. There is not a good system for financial communication in the hotel. We roll the dice every month. We roll the dice hoping the revenues materialize and when they do we expect a certain profit picture to emerge. When it does, this is great. When it does not happen, we are surprised. What happened to the revenues and why are the costs so high? Didn’t anyone see this coming and didn’t anyone react? The answer 19 times out of 20 is, that’s right, no one knows what the HE double hockey sticks LL is going on financially in their hotel. Department managers don’t know if they are making their revenues or not, and they have no plan for the day when the phone stops ringing.

All of this is because the hotel does not have a financial leadership system. The executives have not created the system in the hotel. You can’t buy this system. It must be created and maintained by the; GM, the director of finance, the executives and by each departmental manager. There is no other way. The attention to this system is an ongoing daily function that needs to be the obsession of the entire team lead by the GM. It’s as essential to the hotel's health as being obsessed with great guest service and outstanding employee engagement. Without this financial obsession, the patient, the hotel is on its own, left up to chance. Chance is the development of events in the absence of any design.

Create a financial leadership system in your hotel. It starts with the monthly forecast. Every leader who produces revenue, consumes expenses and schedules labor participates in the forecast creation. The forecast is produced by the department managers and consolidated by the director of finance. Inevitably changes will be needed to the details of the forecast to reach the overriding financial goals of the hotel. When this happens, we cannot just make changes and add a little revenue here and pinch a little expense and payroll over there. Leaders must make these changes to their forecasts to ensure any buy in. In the absence of this buy in your leaders are literally thumbing their middle finger at you. Don’t make this critical error. Ensure all leaders start the month knowing what their numbers are and ensuring that they created their own numbers. Do not make the fatal mistake that so many make and skip this step.

The second part of the system is that we give the numbers a voice, the right voice and we ensure everyone hears it every day. I can’t tell you how many times I go to a hotel and ask the managers how room revenue is coming along this month or how banquet revenues are. They look at me like I just asked them how their ballet lesson was. Financially engaged leaders need to know their numbers and to help with this we make the numbers just as important as guest service and colleague engagement in all our daily communications. Leaders need to know every day what the sales were yesterday and month to date for rooms and food and beverage. They need to know the pickup in both areas and the bridge to make the forecasted revenues for the month. We make sure every communication meeting and lineup includes the financial update. Knowing where our business stands from a revenue point each day is critical for our entire leadership team.

Tracking the revenue build in the month for the month is essential as it allows the leaders who have planned their expenses and payroll to adjust their spend according to how the revenue picture is emerging. Adjusting payroll and expenses is the quintessential action we want our leaders to be able to accomplish. To pivot when we’re down 10% on the top line to forecast is the move we train for. If we don’t teach our managers to adjust their spend to the projected revenues in the month for the month we miss the ability to manage the flow through. It is completely inadequate to leave it up to someone else to sound the alarm bell. It’s inexcusable to have a look mid-month and see how things are “coming along.” We need to hear the numbers daily, the pickup, the bridge and the latest projections so we can adjust our spend in the month we are in. In the month for the month is our battle cry!

The fourth part is the review of the month-end financials by the same leaders and managers who produced the forecast, tracked their progress and made their adjustments. They review the freshly printed P&L and general ledger detail to ensure that their lines have the values they managed and not some other numbers. This ensures that we complete the circle and each manager and leader has the tools and processes to own their own piece of our financial process. This ownership is the key to the ongoing monthly financial exercise we take on.

The last part of the financial leadership system in the hotel is that each manager and leader who participates in the system writes their own commentary, detailing the planning and execution of their part of the forecast and the month’s business. Note what worked and what didn’t. Learn every month and know that the job will never be done or mastered.

Managing the operating financial piece in your hotel is not difficult. What makes it challenging is there are many people and departments involved and time marches on. To combat that, we need a simple effective system for financial leadership. We need a hospitality financial leadership communication system.

About David Lund

David Lund is The Hotel Financial Coach, an international hospitality financial leadership pioneer. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with Fairmont Hotels for over 30 years.

He authored an award-winning workshop on Hospitality Financial Leadership and has delivered it to hundreds of hotel managers and leaders. David coach’s hospitality executives and delivers his Financial Leadership Workshops throughout the world, helping hotels, owners and brands increase profits and build financially engaged leadership teams.

David speaks at hospitality company meetings, associations and he has had several financial leadership articles published in hotel trade magazines and he is the author of two books on Hospitality Financial Leadership. David is a Certified Hotel Accounting Executive through HFTP and a Certified Professional Coach with CTI.